BT : The right balance

Business Times - 05 Apr 2010

THIS WEEK'S TOPIC
The right balance

Should the government intervene in the property market or leave it to free market forces? Why?

Tan Tiong Cheng
Chairman
Knight Frank Pte Ltd

INTERVENING in the property market is a little like kite flying.

For the kite to be flightworthy, all the key components that go into its making have to be in the right balance. Miss one critical element and the kite will not take off. Then when launching the kite, the string should be let loose just enough for its ascent. Release too fast and the kite will go out of control and may crash. If it dips, pull the string a bit to give it some lift. But tug too hard and the string breaks. All this while, watch out for unpredictable wind currents.

Managing the property market is an unenviable task. The majority of Singaporeans are homeowners. What happens to the property market also affects the economy, so government intervention is a given. But perhaps what will help the market is more accurate data on price, as well as demand and supply trends. The kite flyer can then pay attention to the right things.

Lim Choo Leng
Managing Director
HSL Constructor Pte Ltd

I AGREE there must be some control, but current controls such as the imposition of stamp duty if the land is sold within a year appears to benefit the government more than those bidding for land plots.

A system where land is always allocated to the highest bidder is not one that is fair to would-be purchasers. A better way would be to ask for a development plan as well as offer price, and then award the land to the one with the fairest offer.

In general, the property market can only be controlled if the government does not have its own bottom line to consider.

Sim Giok Lak
Chairman
Zicom Group Ltd

LAND is a scarce commodity in Singapore. The government has the responsibility to ensure that the best prices or benefits are obtained from state land as these add to our country's reserves.

At the same time, the government has to moderate the effect of such prices so as to ensure that the citizens can afford the housing built on it and property rentals are competitive for businesses to operate and both local and foreign talent can afford them and continue to stay.

Developers, as businesses, are focused on maximising profits. If they get land at cheap prices, they are not obliged to sell the properties cheap.

During the last nine months, the rate of increase in property prices has run ahead of the increase in construction and land costs. This is not because developers have come out with cutting edge designs or innovations that change the whole living style that justify the rapid increases, nor are there really any housing shortages. It was primarily driven by a strong global economic recovery coupled with high liquidity and low interest rates.

In effect, developers who have sat on their property launches which they withheld when times were bad, benefited from the bonanza without any real effort.

In the three years preceding the global economic crisis, developers also reaped huge profits from an economic boom and as a result, most of them have been armed with very strong balance sheets. This has enabled them to withhold and time their property launches to maximise their gain.

I do not believe that, had any developers got the two properties mentioned by Mr Simon Cheong at below the government's reserve prices, they would reduce their margins and mark down their prices below comparable properties bought for higher prices if the demand is strong.

Although it was said that private properties represent about 16 per cent of the housing market, the rise and fall of this market is linked closely to the mass market and to some extent the commercial and industrial real estate sector as well.

During the global economic crisis the government very boldly and promptly launched a slew of stimulus measures amounting to $21 billion that helped industries across all sectors. The per capita amount of these measures far exceeds many other bigger countries' measures. As a result, we succeeded in minimising local business failures and managed to control retrenchments.

As a local company, we are thankful for these measures. I believe the profits from land sales judiciously managed have helped to strengthen our reserves so that we could afford these stimulus measures in such bold strokes.

Singapore has limited land resources compared with countries such as Australia which has a huge land mass and a relatively small population base. In these countries, governments have not found it necessary to manage land prices as it is not a scarce commodity.

As a private business, I would like less government involvement in businesses that the private sector is engaged in. Thailand has land control policies but government's involvement in business is minimal. Notwithstanding political turmoil in recent years, the economy continues to grow all these years as private enterprises form the main engine of growth. However, in the case of the property market, I believe government's continuing involvement in managing land prices is necessary, in view of our constraints.

As a matter of better transparency, the government should disclose the reserve price for land being tendered, although it would generally not bind itself to accept any prices tendered. Prompt statistical analysis of housing data, property sales and price information, published by the government and made readily available to help the genuine public buyers to make informed decisions would be useful tools.

Liu Chunlin
CEO
K&C Protective Technologies Pte Ltd

PRIOR to 2008, there would have been greater unreserved advocacy of a free market mechanism. But as the financial crisis of 2008 and the subsequent government bailout plans in the US and other countries have shown, untrammelled free market has its pitfalls.

In Singapore, we need to capitalise on the robust market mechanism by allowing each of the stakeholders relative play. The key players are the government as the largest land bank holder, the developers and banks and the consumers which include overseas buyers who are allowed to buy certain categories of properties.

What is important is creating a fair playing field for all for the benefit of a stable market. There should be a win-win-win outcome.

Hence in this context, I am in favour of the current 'managed' free market where the government gets a fair value for state land sold, the developers make a reasonable profit without manipulating the market and where citizens and consumers can afford to buy and own properties in tandem with economic prosperity.

Anything else holds the danger of grievous damage to the market, which we can least afford in a small open economy like Singapore.

Krishna Ramachandra
Managing Director
Arfat Selvam Alliance LLC

THE simple answer is the government should intervene when it feels it is appropriate to do so. There are no two ways about that. The reality is the relevant ministries have all the relevant housing and financing data and economic indicators at their disposal which should allow them to take appropriate and properly weighted interventionist measures.

However, I say this is the simple answer purely because there is more to managing a property bubble than introducing interventionist policies or initiatives. I believe the recent comments by the Redas president perhaps reflects the fears and frustrations of property developers trying to develop a market amid a regulated and a not readily clear bidding system.

Whatever the reason, the government should take heed of the comments and better implement policies and initiatives as they will have an immediate impact on property developers.

Ultimately the property developers are the life-blood of the property market and the manner in which their businesses are allowed to grow has to be considered as the bubble is pierced.

David Leong
Managing Director
PeopleWorldwide Consulting Pte Ltd

The macro-economic effect of bubbles can be widespread and detrimental if not managed and intervened appropriately. There is no such thing as a good bubble. It is simply a temporary euphoria that can cause an uplift of market sentiments; but if prolonged, the bubble can lead to irrational exuberance that will certainly lead to a painful collapse of prices.

Even with cooling measures put in place by MND, the prices of properties are persistently testing new highs. The pervasive low interest rate regime has a great effect on buyers' sentiment.

Property as an asset class becomes desirable as it is a good hedge and has good capital gain potential. Hot money from around Asia, the Middle East and Europe looking for a safe investment can bet on the property market. The government's intervention approach should be to curb excessive speculation where the velocity of price increase is slowed down - but does not limit buyers' investment direction.

Since human nature is both imitative and inventive, it can be detrimental to the whole property market when prices crash. This will affect genuine buyers for owner-occupied properties, and the government's intervention is needed to ensure that genuine buyers are not sidelined to a point where prices are artificially high and out of reach to them. This will be a fundamental error in policy and property investments are not perpetual money machines - where prices move upwards in a straight line.

Now everyone seems to suffer from what I call pro forma disease - that is, taking the sharp rise in prices and projecting them endlessly into the future.

When your hairdressers and men in coffee shops start talking about investing in property, it is the start of the pro forma disease and can lead to irrational euphoria.

A certain degree of intervention is needed by the government to manage the velocity of price shifts through interest rates and taxes so that bubbles do not blow up to cause asset deflations.

Tan Kok Leong
Principal
TKL Consulting

IT is the duty and responsibility of government to rule and conduct policy for the common good. This includes measures to moderate soaring property prices.

Each property cycle averages 10 years. It has different life duration, traits, dimension, and operates under different fiscal, monetary and credit environment. Most of the property cycles in the past unfortunately needed intervention for fear of property bubbles resulting from an increase in land supply, interest adjustments, tax measures, and loan amount manipulation.

An active property market with a stable, moderate and sustainable growth in price is good for the economy.

R Dhinakaran
Managing Director
Jay Gee Enterprises Pte Ltd

WHILE the free market economy appears to be fairer, market play in practice may not always lead to the right solution because of information asymmetry in the market.

Governments or regulators have a significant role to play in making sure the market play remains fair and transparent. The regulator is entrusted with this responsibility to make sure that the information asymmetry does not lead to bubble formation.

The government has also stayed clear of trying to play a controlling role in the already spiralling property prices.

The recent measures, if anything, are only trying to make it less interesting for speculators. The additional costs on stamp duty and stricter lending norms are not in any way affecting genuine buyers of private property - admittedly a relatively small and niche segment.

However, unbridled market play is certainly a recipe for trouble as we have just witnessed across the world when the ‘free market' in the financial sector was taken for granted and caution was thrown to the wind.

Lim Soon Hock
Managing Director
PLAN-B ICAG Pte Ltd

I CONSIDER housing to be a basic need of our citizens that our government needs to be engaged in constantly, as in other essential services, especially public housing. In this regard, properties should be affordable, relative to the state of the economy.

It is also the only way for Singaporeans to own an appreciable asset, a point that is often highlighted by our government.

I think when our government intervenes in the property market, it has a larger objective in mind: moderate property prices and ensure that the market does not get overheated, out of synchronisation with the health of the economy, to the extent of creating a bubble.

Should there be one and it bursts, the consequences on our economy, being open, will be disastrous, as we have witnessed in the recent sub-prime crisis.

I do not think the government has any intention now or in the past to depress property prices. It is not a prudent step to take.

Relative to the market forces, the government's hand hitherto, remains weak.

This is borne, yet again, by the overall price increases of 2-5 per cent and the doubling of sales of new private homes to nearly 4,000 in the first quarter, according to the recent report by CB Richard Ellis.

Sam Yap S G
Group Executive Chairman & Co-Founder
Cherie Hearts Group International Pte Ltd

MY personal view is that the government should continue to play an active role in the property market. It should be recognised that the housing market is a laggard, with immense information asymmetry.

In Singapore's context, where the supply of housing is very limited due to our land constraints and there are few market players in terms of developers, the industry, if left to market forces, would certainly tilt in favour of the developers at the expense of ‘ignorant' consumers.

In addition, it is naïve to suggest that private housing prices should be left to market forces since the segment serves only 16.5 per cent of the overall population - clearly, this is not the case as public and private housing prices are closely intertwined.

I feel that government intervention in the property market, while not necessarily perfect in terms of matching demand to supply, is the better choice between the devil and the deep blue sea. This is not least because the availability of affordable, quality housing is of utmost importance to the social stability of our nation.

Teng Yeow Heng Michael
Managing Director
Corporate Turnaround Centre Pte Ltd

I CAN understand the concerns of the government to prevent a property bubble from escalating further with its dire consequences should it burst.

However, the governmental measures taken so far have been rather reactive in addressing the symptoms rather than the root problem. Property prices continue to rise notwithstanding the measures taken so far, and could scare away foreign investors because of the uncertainties about what the government may do next.

I am glad that the government recently announced that it will not intervene in the private property sector. The rise of property prices is due to external factors such as low interest rates, confidence in economic recovery as well as internal factors such as pent-up demand from en bloc sales, increase of foreign immigrants, Singaporean desires to own property and shortage of HDB apartments.

The government can help to address the last factor which is a major problem. It is crucial to build more HDB flats quicker and cheaper. Many Singaporeans are unable to buy HDB flats in the primary market because they have exceeded the income limit. Many are still on the waiting list.

In addition, there are many private property owners who are retirees or unemployed but unable to downgrade to HDB because they have to buy HDB apartments from the secondary market.

Prices for HDB flats in the secondary market have also risen a lot. The increase in prices of property is a good thing in tandem with the economic recovery but what needs to be done is to ensure that Singaporeans do not get into financial trouble because they buy properties that they cannot afford. Supplying more affordable HDB flats in the primary market will help these Singaporeans from over-committing themselves financially.

Roland Mathys
CEO
Jurong Cement Ltd

WHILE in theory absolutely free markets are desirable, in reality this is in many cases not in the interest of society or a country.

The recent financial crisis is obviously the best example, where largely unregulated risk-taking resulted in huge losses with unprecedented consequences for individuals, societies and countries. Many countries will possibly never be able to pay back their debts, unless they increase taxes to levels which will stifle economic growth with the corresponding consequences for their citizens.

There is no doubt in my mind that the Singapore property market has already entered a highly speculative stage. And as soon as a market is in this phase, greed is the predominant driving force. But the government is very well aware that record-low interest rates, which sooner or later will rise, unsustainable low rental-yields and high leverage pose a significant risk for many of these investments.

What the government is trying to do now is to protect the individual and also the entire country from a bubble that may have wide-ranging consequences in case it bursts. In that sense, I think it is a wise move and a necessity for the government to step in and prevent an even greater bubble to form.

Dora Hoan
Group CEO
Best World International

IN A free market economy, theoretically, the highs and lows in the market should be affected only by supply and demand. Following this line of argument, any institution with enough clout to sway the movement of the market - like the government - should stay out of the way and let the market run free.

However, we witnessed how unbridled free market capitalism without responsible government regulation provides no guarantee that it is able to remain free on its own.

Over the past year, there has been much discussion about how the financial crisis exposed weaknesses in the free-market theory itself. While I believe that free enterprise remains the most efficient system ever created, we have learned the hard way that not everything can be solved by deregulation, free competition and the market.

Let me emphasise though that it was not the free-market model that failed - rather, it was inherent greed, speculation and mismanagement among the market participants themselves.

Throughout the world, we have seen renewed recognition of the essential role played by government intervention. The sub-prime mortgage fallout is an excellent example of what a government can do to try to keep the economy from plunging into a nosedive. Likewise, we have seen various modes of government intervention in modern countries with a long tradition of democracy.

In the case of Singapore's property market, I believe that we need to trust our national leadership's intentions to regulate and avert any manipulations in the market system and avoid excessive hikes in prices. I am of the opinion that this kind of control is essential both as a corrective and a preventive measure for as long as it is applied to specific situations, temporarily, sparingly and with great circumspection. It is not so much about 'more or less government' in markets, as it is about smart, enlightened and decisive governance.

Joshua Yim
CEO
ACHIEVE Group

THE financial tsunamis that began in the US stemmed from the collapse of the housing market, which was driven by greed that resulted from the lack of a proper regulatory framework. So-called free market forces enabled the US property market to boom since 2004 and this lack of regulation is why the financial crisis arose in the first place. Thus, we should learn these lessons from the US and not repeat the same mistakes.

That is why I believe we need to have a regulatory system to monitor the property market closely in order to prevent such a housing bubble from forming and then bursting and shattering the foundations of our economy.

As a business person, I certainly acknowledge the need to allow free market forces of demand and supply to determine the value of assets. Yet with fiscal intervention by the government, since the aim is to cool down speculation in the market, I feel that is definitely the right thing to do.

Ultimately, the key is to strike the happy balance of implementing control measures in tandem with free market forces driven by individual needs and demands.

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